North Africa out of new Charlemagne MENA fund

Emerging markets specialist Charlemagne Capital has tilted a new Middle East and North Africa fund 90% towards Gulf Co-operation Council countries, largely avoiding the political hotspots within its universe.

The Magna MENA fund will initially have a “high allocation” to Saudi Arabia, Qatar and Abu Dhabi among its 30 to 40 holdings, according to manager Mark Krombas.

This largely avoids direct exposure to Tunisia, Libya, and Morocco – all beset by varying levels of unrest – and to emerging market Egypt, recovering from its own.

While other managers have also recently stressed their lack of exposure to the MENA region, some allocators say the Gulf region may ultimately offer little shelter.

Exchanges in Saudi Arabia, Abu Dhabi and Dubai already fell by about 5% last month, ranking them among the worst six of 50 frontier markets, according to the Voltan Frontier Markets fund. Tunisia was bottom.

Ana Armstrong, chairman of Distinction Asset Management, today dubbed Saudi Arabia “a ticking time bomb” that could follow Libya.

Alison Graham, manager of Voltan’s fund, reassured investors Egypt’s troubles had “no effect on our portfolio [because] our only exposure to the Middle East is through several Kurdish oil companies, which have no commercial or political links to Egypt”.

Mark Krombas, lead portfolio adviser at Charlemagne, said: “We will watch events in Egypt and North Africa closely as we expect market inefficiencies to create good opportunities.

“The North African countries in the region offer more traditional emerging market attributes, such as attractive demographics and rising income per capita,” he added.

However, he noted the best opportunities were in the Gulf.
Countries there benefited from high oil prices – Brent Crude is at $104.90 per barrel now, up about 35% over 12 months – and from current account surpluses, high net savings and “a global redistribution of wealth from resource poor to resource rich countries”.

He added the region also had a low tax regime and culture of paying dividends.
This, he added, “enables them to enjoy expansionary budgets and to invest heavily in job creation and on improving domestic infrastructure.

“Over the long term, the GCC region is benefiting from structural change as the countries invest in diversifying their economies away from oil and gas, and also as they move further downstream in the oil and gas segment to better exploits their resources.”

Charlemagne’s fund is registered for sale in Switzerland, Germany, Austria, the Netherlands, France, Italy, Luxembourg and Denmark, and is seeking registration in Finland and Sweden.

Dinstinction’s Armstrong said while Libya holds Africa’s largest oil reserves, Saudi is the world’s largest producer and, despite strong economic growth, suffers high unemployment, corruption and “huge disparities in wealth”.

She says the preponderance of young males could heighten unrest, as might a “vocal Shiite minority” discriminated against.

Oil majors have started repatriating staff from the region in a move that will disrupt production and cause a risk premium in prices “for an extended period”.

Armstrong does not rule out the possibility of a rerun of the 1970s oil crises, dampening global economic growth.

“Exogenous factors pushing energy and food prices higher will continue to impact headline inflation numbers in the West,” she adds.

Unsurprisingly, gold and bonds have rallied against this backdrop. Armstrong counsels selling bonds due to inflationary concerns, but says the turmoil “has shown the value gold in a portfolio”.

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